The phrase “this time is different” is often associated with a blithe understanding of the past and an unwillingness to accept time tested facts. Most often this phrase is uttered at stock market tops as an indication that basic rules of economics no longer apply. Unfortunately, there is a back door reference to “this time being different” when market analysts, of the bearish perspective, make claims that this “exceptional” market run is being fuel by the Federal Reserve.
The thought is that, with all the printing of money and “quantitative easing”, the only reason that the market could possibly rise as much as it has is because of the Federal Reserve. In this piece, we’re going to show that Fed or not, after a large decline of nearly 50% in one stretch, retracing 50% to 100% of the prior losses is typical market behavior.
Starting with the period from 1861, the average price of the 10 leading stocks (rails) based on trading volume went from the level of 50 to as high as 141 in early 1864. They subsequently declined from 141 in 1864 to as low as 43 by 1877, a loss of -69%. The following rise, from 43 in 1864 to the level of 121 in 1881, was an increase of over 79%.
After the 1881 peak in the 10 leading stocks at the 121 level, the average promptly dropped to the 65 level in 1884, a loss of over -46%. The rise from the bottom in 1884 took the index to 102 in 1890, an increase of 66%. This was quickly followed by a 41% decline 60. After trading in a tight range until 1898, the leading stocks rose to 180 by 1905, a gain of 200% in eight years.
The preceding examples were derived from the book “Wall Street and the stock markets: A chronology (1644-1971)” by Peter Wyckoff. For those interested, Wyckoff specifies exactly which stocks were initially included in the leading stocks and which stocks were added and dropped in the period following.
Switching to the Dow Industrials from 1906 to 1922 below, we show that declines of 40% or more resulted in rebounds of 50% to 100% of the previous decline:
The take away from this is that the current Federal Reserve did not exist prior to January 1914. There was no way to ascribe the gains of the market to a central bank. All iterations of a central bank with the First Bank of the United States (1791-1811) and the Second Bank of the United States (1816-1836) did not have any effect on the data sets that we have provide from the period of 1860 to 1914. In order for the claim that the current market run is based on the monetary policies of the Federal Reserve, we’d need to be able to demonstrate that the stock market would have performed differently without the existence of a Federal Reserve.
Unfortunately, those that claim “this time is different” aren’t trying hard enough to prove their claim false. A cursory review of market data during the periods from 1860 to 1914 makes it clear that declines of nearly 50% or more are likely to retrace 66% to 100% of prior declines. This patten has been easily demonstrated in the periods after 1914. However, we’re only trying to illustrate that the acceptance of the Federal Reserve’s role as the leading cause of the current 69% retracement of the prior decline (2007-2009) is false.Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.